Health Savings Accounts-New Federal Law for 2004

By Sandy LeDuc
LeDuc and Sikowitz

In the spirit of taxpayers, employees and patients taking responsibility for their own health-related expenses, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has added a new section to the Internal Revenue Code to permit eligible individuals to establish, with deductible contributions, Health Savings Accounts (HSA) beginning in 2004.

The accounts are similar in operation to IRAs. They are for the benefit of a single individual. They are portable and can be accumulated over time. Contributions are based on the type of insurance coverage of the individual covered at the time of the contribution.

Eligible Individuals
An eligible individual is any individual who is covered under a high-deductible health plan (HDHP).

High-Deducible Health Plan
This is a health plan with an annual deductible of at least $1,000 and not exceeding $5,000 for a self-only plan or $2,000 to $10,000 for a family plan.

The eligibility of a plan is not affected by the existence of workers' comp, disability, health coverage under property insurance, long-term care and other similar types of coverage.

HSA Custodians and Trustees
A plan can be established at any bank or insurance company that chooses to provide such accounts.

Contributions
Contribution limits are determined monthly and may total as much as $2,600 for individuals and $5,150 for a family.

The contributions are deductible even if the taxpayer is not able to itemize his or her deductions. Employer-paid contributions are not includible in employees' compensation.

Distributions
Distributions for eligible medical expenses are not taxable. Eligible medical expenses generally include the same types of expenses that might be expected to be covered under a health insurance policy. Distributions for purposes other than eligible medical expenses are both taxable and carry a penalty.

Massachusetts
Practically speaking these accounts are not commonly available in Massachusetts because the HDHPs that these accounts are designed to supplement are not available in Massachusetts. As health insurance premiums climb, Massachusetts may see more eligible policies.

The plans are also suffering from a general lack of interest in the insurance and financial communities causing institutions at which the accounts are to be held and administered to be slow to promote them.

Essentially though, these accounts are another attempt to help manage ever-increasing medical by involving the consumer in the risk proposition.

Spring 2004 -Volume 14, Number 2

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